DB pensions are in a hole, let’s swap the DWP’s spade for a ladder



Bowles my liege…

It’s a great shame to read Guy Opperman excising Sharon Bowles amendment to the Pensions Act. The Bowles amendment  would give open pension schemes the capacity to be funded as ongoing concerns rather than being lumped in with schemes that have decided to shut up shop.

Estimates of the cost to schemes like Railpen, USS and many smaller schemes with “open” sections are being prepared and will be delivered in the window  between now and November when the Pension Schemes Bill Committee calls for evidence.

I suspect submissions on the section granting TPR greater powers to point to the near unanimity of published responses to the DC consultation paper ( I have read over 20 responses and published quite a few). In all my time following pension consultations I have never seen such unilateral  negative feedback.

Shortcomings of the Pension Schemes Bill

Almost all these submissions point out that the DB consultation contains no estimates to the cost of employers of implementing the new DB funding code.

The absence of any impact study or cost benefit analysis is a major failing of the Code consultation. It is clear that the cost will run into hundreds of billions – just adding up the individual scheme estimates of which I am aware, the figure reaches £160 billion.

These estimates – highlighting the cost to open schemes resulting from TPR’s current consultation (empowered by the Pension Schemes Bill) will rightly be the headline of a campaign to get Government and MP’s in the House of Commons to side with common sense and reinstate the Bowles amendment.

I will not steal the thunder of those preparing their submissions but focus instead on the social and economic impact of putting open DB scheme in funding lockdown.

Unintended consequences

The DB consultation (and the powers granted to TPR to enforce it,  have some serious unintended consequences and will leave Guy Opperman’s infrastructure and illiquids as unfulfilled dreams. Here is a message received from one of Britain’s leading ESG advocates

“If UK pension funds are on a course to matching assets/buyout etc. Then this is largely going to be done via UK government debt.

Through time, funds will hold more and more of this. However, in a world of TCFD and the transition to net zero, this means that for these funds, their biggest climate exposure becomes the UK government.

It also begs the question where the corporate engagement will come from in the near-term as DC is still small compared to the DB universe and so the market power isn’t there to engage in stewardship and shift corporate behaviour.

Similarly, where are the significant investments going to come from that will enable the transition to net zero in new tech and infrastructure etc.

All told, the ability to hit climate targets is challenging and if DB world is largely exposed to the UK government, then it is unlikely that any of the climate targets can be achieved.”

Why closed schemes cannot afford illiquids

We need open schemes for infrastructure to be a major portfolio asset – closed schemes cannot tolerate the risk of restructuring evident – first round debt investors in Eurotunnel saw just 1% of their original loans.

The delays associated with restructuring leave the closed scheme which is dependent upon the contracted cash flows in the lurch. Corporate credit is exceptionally risky for closed schemes as most defaults arise at the time when investors want their money back.

The promotion of illiquid investment when investors cannot afford patience is going to put an impossible strain on DB schemes.

And there is a third problem arising from the DB code which threatens the capacity of Britain to build back.

Con Keating estimates the impact of high DB funding demands  will depress Britain’s economic growth by about 0.5% pa – and that it will be persistent in a way that we hope Covid and Brexit won’t be.

Given that the demographics imply that Britain’s economic growth will struggle to exceed 1% pa, that is a drag we can do without.

And where is all this funding going? It is going to the generation who still benefit from DB and who are seen by younger generations as the architects and principal perpetrators of the ills behind climate change.

Holes, spades and ladders

If the Government wants to pour fire on the flames , then in forcing the de-risking of DB schemes and the shift towards mass closure they have found an ideal policy.

But I do not think that this is what Guy Opperman wants , I don’t think he wants it at all. I don’t think that this sentient pensions minister is actively pursuing a policy where he paves over the fertile soil for patient capital while sowing seeds in the stony ground of workplace pensions.

I suspect that Government has got itself in a pickle over DB funding and it is not too late for it to de-pickle. If you want to have your say and promote the Bowles amendments for all the reasons above (and more), you can do so by making your submission to the Pension Schemes Bill Committee by November 3rd.

Here is the link 




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to DB pensions are in a hole, let’s swap the DWP’s spade for a ladder

  1. Eugen N says:

    Henry, if you want to get pension schemes to invest again, you need to reduce the PPF guarantee to 70% or so. And you need to have two tests in place, (1) enough funds (on a AA rated corporate bond) to pay 70% of accrued pension benefits, if the sponsoring employer fills tomorrow for administration and (2) enough technical provisions to pay all benefits promised for the long term.

    Apart from that, the scheme actuary should be let to recommend the best investment policy based on membership, sponsoring employer covenant etc.

    I was speaking with someone in the US, and a few of DB schemes over there have this target to have the funds at any time to buy a 70% – 75% deferred and immediate annuities for the scheme members and an investment policy which will target 100% of benefits.

    The only way to be allowed to lower from 70% is in case sponsoring employers commit guarantees like first charges on some unencumbered assets to the pension scheme to make it above 70%.

    This will allow sponsoring employers with good financial positions to increase the amount of investment risk in their scheme further.

    This takes away the risk we end up with schemes well underfunded like 40% – 50% where the sponsoring employer fill for bankruptcy.

    You cannot have it both, very high guarantees even if the employer fill for administration and to take investment risk. I agree with you schemes should take more investment risk, but something will have to give in this case, and a lower PPF guarantee should be brought in. It is the high PPF guarantee from the Pension Act 2004, that brought us here, it has to go.

    The majority of schemes will still pay 100% benefits, there would be failures, but not many. Many schemes have already over 70% worth of assets, and their sponsoring employers could look to improve their businesses, reduce debt etc. There could be a measure that dividends could not be increased until a certain condition will happen.

    One last thing, there must be a rule for M&A. Many private equities firms buy good firms and leverage them up and put the pension scheme in jeopardy, as leveraged businesses could easier get bankrupt.

  2. Pingback: The heavens open on tPR and DWP’s DB plans | AgeWage: Making your money work as hard as you do

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